Good morning,
Earnings season continues, but today I wanted to focus on an acquisition that was both surprising and not surprising all at the same time.
On to the update:
Amazon Acquires One Medical
From the Wall Street Journal:
Amazon.com Inc. is buying an operator of primary-care clinics, a significant expansion that will help the tech giant offer medical services to a large pool of employers and individuals and that underscores its sweeping ambitions in healthcare. The $3.9 billion deal, including debt, for 1Life Healthcare Inc., which operates a primary-care practice under the name One Medical, is the first major acquisition announced during the tenure of Chief Executive Andy Jassy, for whom expansion into healthcare is a top priority. Amazon will gain access to a practice that operates more than 180 medical offices in 25 U.S. markets and works with more than 8,000 companies to provide health benefits to employees, including with in-person and virtual care. That adds significantly to a smaller service Amazon launched in 2019 and for which it had signed up a limited number of employers in the last year.
The deal adds momentum to the push by technology and retail giants to make inroads into the nation’s $4 trillion healthcare economy. That push, along with new technology and medical discoveries, has fueled growth of medical care outside of hospitals and patients now more regularly seek care in more convenient and lower-cost settings. Demand for telehealth during the pandemic increased the use of virtual care. Yet the healthcare industry, which is governed by state and federal regulations and an array of companies and providers operating in myriad ways, has proven notoriously difficult to disrupt. An earlier attempt to expand into healthcare, a joint venture set up by Amazon, Berkshire Hathaway Inc. and JPMorgan Chase & Co. called Haven, fizzled after three years. The three companies spent roughly $100 million but struggled to manage fundamental issues related to the cost of healthcare, data and staff turnover.
The failed venture with Berkshire Hathaway and JPMorgan is an interesting place to start; at the time of the announcement I wrote about how why Amazon might be interested in the health care space in Amazon Health; broadly speaking:
- Amazon had ambitions to take a slice of all economic activity, which made health care an obvious target given its outsized share of GDP.
- Amazon’s approach was to build infrastructure for itself and then make that infrastructure available to others as a service.
- Amazon’s goal was likely to build a front-end for its own employees to access healthcare services and then create a marketplace for the fulfillment of those services, attracting suppliers by virtue of the demand it would be able to generate once it opened up that front-end to not just its employee base but employers of all types.
I concluded:
The scenario that I sketched out above is wildly profitable, to be sure, but only years down the road when demand is fully aggregated and Amazon Health Marketplace is taking a skim off of every transaction; if short-term profit isn’t the goal, long-term goals become much more realistic…There is no more patient company than Amazon.
I felt a bit burned for this ambitious articulation when Haven, the name of their joint venture, closed up shop in 2021; the Wall Street Journal wrote:
Amazon.com Inc., JPMorgan Chase & Co. and Berkshire Hathaway Inc. set out three years ago to join and transform health care. Instead, they struggled to solve even fundamental challenges, such as understanding what some kinds of care actually cost. Haven, the joint venture they set up together in 2018 to use technology and find new ways to reduce costs for their combined 1.5 million employees, will end operations next month. The project cost the three companies roughly $100 million combined, people familiar with its budget said.
From its inception, Haven faced challenges obtaining data, staff turnover, fuzzy goals and unexpected competition, according to current and former employees and executives at Haven and the partner companies. Those factors doomed the partnership from early on, those people said. Data was a central challenge. Haven struggled to aggregate and analyze information on health-care costs for the three companies’ employees. Data concerns from the partners and resistance from insurers stymied Haven’s efforts to determine how much the companies paid for medical care and why, the people said.
The obvious takeaway was that healthcare was too complex, even for Amazon, but maybe I had it right; after all, there was an alternative explanation for why Haven failed — from the same Wall Street Journal article:
While leaders of the founding companies were initially optimistic about Haven’s potential, the challenge of applying its work across three sprawling corporations slowed progress and added complexity, the people close to the venture said. Eventually, the companies realized they could implement many projects more efficiently on their own, they said.
Those projects included Amazon Care, a front-line service that started with telehealth services and has, over the last few years, expanded into in-person services in patients’ homes; CEO Andy Jassy brought up the service as one of the areas he was most excited about in an all-hands meeting last year. From Business Insider:
During a November all-hands meeting, an Amazon employee asked CEO Andy Jassy to share the “innovations” that most excited him at the company. Without much hesitation, Jassy mentioned Amazon Care, the company’s new primary-care business, as one of his top picks, according to audio of the meeting that Insider obtained. Calling Amazon a “significant disruptor” in the medical-care field, Jassy expounded on the potential benefits of Amazon Care, which connects patients with doctors over text and video — and in some locations, mails prescriptions and dispatches a nurse to people’s homes for exams and labs. He said its on-demand telehealth capabilities could significantly improve the medical-care process, which relies on long wait times, unpredictable scheduling, and additional stops to pharmacies to pick up medications. Ten years from now, he added, the standard experience of seeing a doctor today would look “crazy.”
One Medical certainly reinforces that Jassy is committed to Amazon’s healthcare initiative; it also reinforces the idea that remaking healthcare will be a long slog.
One Medical Allure
One Medical, like Amazon Care, starts with a digital platform and telehealth services; this includes not only the consumer-facing front-end but also a proprietary electronic health record (EHR) system. The next step for patients, though, is not a nurse visiting their home, but rather a network of physical clinics. When One Medical started in 2007 it was only available through individual memberships; over the last few years, though, the company has partnered with companies to offer access as part of their overall health care benefits (Google, for example, is a customer). One Medical also purchased Iora last year, gaining access to the Medicare market; that was an all-stock deal for $2.1 billion at the time, but One Medical’s stock was down by around 75% before the Amazon acquisition was announced; even with an 80% premium Amazon is buying in at half the price.
All of this is pretty compelling to a company with the sort of ambitions I detailed above:
- While One Medical’s EHR system is, as far as I understand, fairly lightweight relative to major players in the space like Epic Systems, it provides a base for Amazon to build out from. Critically, it was built from the ground-up for direct patient access (Epic, infamously, is built first-and-foremost for hospital administrators).
- One Medical’s network of clinics does seem more scalable and cost effective then Amazon Care’s approach of going to people’s houses, although I am speculating about something far out of my area of expertise. What is clear is that Amazon is acquiring a significant supplier base in terms of medical providers.
- One Medical has that big base of customers, both individuals and companies, and the ability to work with multiple insurance providers, including Medicare.
And, of course, there is the price: this will almost certainly not be the last acquisition of a company with a heavily depressed stock; what is unique is that instead of buying technology that it can bring to its user base, Amazon in this case is buying a user base that could, in theory, bring Amazon Care to scale that much more quickly, accelerating the flywheel characteristic of Amazon’s most successful projects.
Reasons for Skepticism
All of that noted, there is reason for skepticism; this comic from Nikhil Krishnan was pretty funny:
Krishnan wrote in the accompanying article:
It seems like Amazon just wants to move into healthcare somehow and One Medical was a fast way to get contracts with employer/payers/hospitals for relatively cheap…
Personally I’m actually pretty ambivalent about this purchase. I expected after the Whole Foods purchase that they were going to do lots of interesting experiments in retail, use the stores as micro fulfillment centers, etc. But the only thing that changed is now I can scan my app to get $3 off of a $150 grocery basket.
I’d love to post a futurist take with lots of retweets about how the primary care and grocery integration will work, or how Alexa will be used for voice-to-text dictation in the office and patient’s home, or how data from the One Medical EMR is going to train AWS natural language processing software to make it better. But honestly I think Amazon is just a big company, and doing risky things in healthcare is not what big companies do (though I’d love to be wrong).
Once I see an interesting business model shift in One Medical post acquisition (e.g. bundled in Prime, launching an insurance plan around it, etc.), my interest will be piqued. But until then, I just see Amazon as owning a regular primary care clinic chain that operates independently with some additional marketing.
The Prime angle is the one most commentators have latched on to, and it makes sense: One Medical has a consumer-facing subscription business, Amazon has a consumer-facing subscription business and, thanks to its huge employee base, can be its own first-best customer.
I think, though, I’m still a bit more skeptical than I was back when Haven was announced.
For me it goes back to the Whole Foods thing: the high-end grocery chain was Amazon’s New Customer, a way to get scale in the fresh food business, but it doesn’t seem to have amounted to a lot. Brick-and-mortar is simply a very different business than e-commerce, and is a sector where Amazon has a lot fewer inherent advantages; that applies even more so to healthcare, which, telehealth notwithstanding, is about as different from e-commerce as can be.
Indeed, if anything this acquisition makes me a bit bearish: Jassy started out his tenure cutting brick-and-mortar stores in what seemed to be a bid to focus on Amazon’s strengths; I wrote earlier this year:
Amazon Retail was, in retrospect, a magnet for mistakes, first and foremost on the part of Amazon, but also on the part of me as an analyst. Think about Amazon’s successful strategies:
- Amazon.com was predicated on the fact that the Internet made it possible to have better selection and better prices (the latter increasingly replaced with superior convenience).
- AWS was predicated on the fact that the Internet made it possible for one company to consolidate the back-end operations of many companies, gaining massive economies of scale and making it possible to offer operational flexibility in exchange for capital IT budget redirection.
- Fulfillment by Amazon and its expansion into logistics was predicated on Amazon.com being the first-best customer, delivering scale and performance and customer access that no one else could match.
Retail stores had none of these advantages. Yes, Amazon talked about using data, and there was certainly a novelty factor associated with the brand, but there was limited selection, non-differentiated pricing, and no scale advantages to leverage…
To that end, I wrote a couple of weeks ago in Beyond Aggregation: Amazon as a Service, that “Buy With Prime” was the first major initiative launched under new CEO Andy Jassy; cutting retail, though, was his first major decision. Both seem to come from the same place of recognition that the only businesses Amazon should be investing in are ones that scale across the entire addressable market.
Healthcare doesn’t seem to fit in this rubric. Yes, it’s a massive market, but its complexity, particularly in terms of insurance, makes a business that “scale[s] across the entire addressable market” impossible to build; has Amazon decided that it doesn’t have any other obvious opportunities for growth? Or perhaps its health care costs are simply so high it feels it needs to do something in the space.
Indeed, that’s perhaps the most optimistic take: Amazon may be invested in front-line health because it has no choice, given its employee base. Still, while that fulfills the “first best customer” framework, it doesn’t explain why Amazon is any more likely to succeed than any other company.
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